May 31, 2019

Business | Markets slide as Trump reignites trade worries with surprise tariffs on Mexico

Telegraph Reporters 31 May 2019 • 9:05am

  • US to impose 5pc tariff on all Mexican goods from June 10
  • FTSE 100 falls 0.8pc in early trade
  • Pound sinks to five-month low
  • Asian stock markets slide
  • Brent crude falls more than 1pc to $65.97
London's main stock index fell almost 1pc on Friday after US President Donald Trump's threat of tariffs on Mexico and disappointing manufacturing data from China focused minds on the threat of a global downturn.
The FTSE 100 shed 0.8pc and the mid-cap FTSE 250 fell 0.9pc in early trade. Both indices are on course for their first monthly falls this year, down 3.5pc and 4.5pc respectively since the start of May.
Data on Friday showed China's factory activity shrank more than expected in May, another stark reminder of the economic ramifications of the Sino-US trade dispute.
Combined with Mr Trump's Mexican standoff, that led London's indices of financial stocks and miners to give up more than 1pc each, while heavyweight oil stocks also skidded.
"The worry is who's next on Trump's list - the EU may be next," analyst Neil Wilson said. "Coming at a time of a breakdown in talks with China, it's another blow to bulls and we should consider further downside risks from escalation."
Housebuilders also fell after mortgage lender Nationwide said British house price growth unexpectedly eased to its slowest rate in three months, shining a light on how lingering Brexit uncertainty is hitting consumer sentiment
The investor mood darkened further when a key measure of Chinese manufacturing activity for May disappointed, raising questions about the effectiveness of Beijing's stimulus steps.
Markets moved aggressively to price in deeper rate cuts by the Federal Reserve this year, while bond yields touched fresh lows and curves inverted further in a warning of recession.
Washington will impose a 5pc tariff on Mexican goods from June 10, which would then rise steadily to 25pc until illegal immigration across the southern border was stopped.
Mr Trump announced the decision on Twitter late on Thursday, catching markets completely by surprise.
"The mercurial President Trump has signalled via Twitter this morning that his mindset is shifting ever farther from reaching trade deals," warned Eleanor Creagh, a strategist at Saxo Capital Markets Australia.
"It seems now that market participants are finally realising that the narrative of [a recovery in the second half of the year] is fast dissipating," she added. "As escalating trade tensions across the globe cause growth expectations to be recalibrated, risk off sentiment will remain and volatility will increase."
Yields on the 10-year Treasury note quickly fell to a fresh 20-month low of 2.17pc, while the dollar jumped 1.7pc on the Mexican peso.
E-Mini futures for the S&P 500 slid 0.8pc and FTSE futures 0.4pc. Germany's DAX shed 0.7pc.
Asian shares fell at first, only to draw month-end bargain hunting having endured a torrid few weeks. MSCI's broadest index of Asia-Pacific shares outside Japan edged up 0.3pc, though it was still down a whopping 7.3pc for the month.
China's blue chip index held steady, partly on talk Beijing would now have to ramp up its stimulus, but again was nursing loses of 6.8pc for May.
Japan's Nikkei fell 1.6pc, dragged down by big falls in car makers.
Sterling was poised for the biggest monthly drop in a year as the imminent departure of Theresa May as prime minister deepened fears about a chaotic divorce from the European Union.
The pound hit $1.2611, nursing a 3.2pc loss for the month so far.
In commodity markets, spot gold firmed 0.4pc to $1,293.33 per ounce.
Oil prices fell to their lowest in almost three months on fears a global economic slowdown would crimp demand.
Brent crude futures lost 91 cents to $65.96.
Investors clearly reckoned that opening a new front in the trade wars would pressure central banks everywhere to consider new stimulus.
On Thursday, Federal Reserve Board of Governors Vice Chair Richard Clarida said the central bank would act if inflation stayed too low or global and financial risks endangered the economic outlook.
"What Clarida's comments have done is clarify in many people's minds the answer to the questions of whether low inflation proving more than transitory would itself be enough to get the Fed to ease – the answer appears to be 'yes'," said Ray Attrill, head of FX strategy at National Australia Bank.
"That served to reinforce prevailing market expectations that the Fed will be easing in the second half of this year."

Source: The Telegraph

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